JLL Green Lease Report 2023 – Key Takeaways – Landlord & Tenant – Leases

The Report re-iterates that the real estate
industry has seven years to halve emissions and the window for
effective action is closing rapidly. To achieve this target, the
industry as a whole needs to transform the way it uses and manages
buildings.

Despite the emergence of green lease clauses over 15 years ago
and some progress being made, there is still a lack of
industry-wide guidance and uniformity. Moreover, the report
highlights the need to transition from “Green Lease 1.0″
to “Green Lease 2.0”, a more flexible and holistic
approach implemented throughout the lifecycle of a lease and which
also addresses the social and governance aspects of ESG.

We summarise five key takeaways from this year’s research
and what “Green Lease 2.0” really means:

1. There are three vital ‘enablers’ to drive this
   change:
   

   1. Education: Green Leasing 2.0 requires
      education, upskilling, multi-stakeholder collaboration and
      behavioural change to achieve a ‘leapfrog moment’ at
      scale.

   
   

   2. Engagement: Green Leasing 2.0 goes beyond
      contractual lease clauses – it means ongoing voluntary
      collaboration between landlords, occupiers and third-party
      stakeholders to deliver on ESG goals throughout the life of the
      lease.

   
   

   3. Equity: Green Leasing 2.0 represents a new
      business partnership on building management, operation, and
      financing, involving cooperation, cost-sharing, and co-investment
      between landlords and occupiers, as well as transparency on goals,
      plans, and risks.




2. Assemble the right team: Including but not
   limited to, a leasing agent, surveyors, lawyers, sustainability
   experts, project developers, facility managers and operations teams
   to assist both the landlords and the occupiers.




3. Beyond Carbon: Circularity, climate
   resilience, and social impact principles are also becoming part of
   green leasing, with social value gaining more attention in the
   leasing process as corporations aim to meet all their ESG
   objectives more holistically.




4. Creative allocation of costs: One of the
   biggest obstacles to green leasing is liability for costs. In a
   standard office lease, a landlord is usually responsible for
   capital expenses which improve their asset whilst the occupier
   receives the benefit and covers operational expenditure. This
   status quo is changing in relation to environmental improvements.
   Creative negotiations are now required, a couple of suggestions of
   which are below:
   

   1. The costs of any capital improvements to the building that
      reduce the building’s energy expenses could be cost capitalised
      and amortised as an annual operating expense. Unreasonable
      expenditure may be mitigated by the charge for yearly amortisation
      being capped at the actual reduction in operating expenses.

   
   

   2. Occupiers could purchase energy from on-site renewables
      provided by the landlord via a Power Purchase Agreement (PPA).
      Landlords could install, own and maintain the on-site generation
      and sell power directly to the occupiers at a fixed rate that is at
      or below the electricity rate offered by local utilities.

   
   

   3. At the heads of terms stage, potential occupiers could agree to
      sign a lease extension or agree to a higher rent if an owner covers
      the capital expenditure of a proposed retrofit.




5. Climate resilience: Green leasing 2.0 also seeks to mitigate
   future natural hazards. The owner and occupier may wish to agree to
   which natural hazards are relevant to the property and draft a new,
   or amend an existing, building resilience plan. Potential
   adaptation measures may include retrofits to the property where
   possible.

90% of office stock is over 10 years old, and even buildings
delivered just five years ago will likely require major efficiency
improvements. In London, there is currently 8 million square foot
of development in the pipeline for Net Zero Carbon buildings
between now and 2026 to serve the 19.2 million square foot of
office space required between now and 2030 by 693 office occupiers
that have signed up to Science Based Targets. The result? A huge
supply and demand gap. To some this may seem like an obstacle, to
others, a huge opportunity. As such, we look forward to seeing how
these concepts progress throughout 2024 and beyond.